Martha: Food Deal as Losses' Bite Grows

Martha Stewart Living Omnimedia (MSLO) is finally taking a bite into its "greatest untapped opportunity" — food — through a partnership it forged last week with Costco. And while MSLO's first-quarter operating loss grew from $7.7 million in 2006 to $12.6 million this year, the company raised its full-year guidance to an operating profit of $9.5 million to $12.5 million.

"We've built a lot of brand equity in this arena," said president and ceo Susan Lyne during the earnings call. "Cooking and entertaining is our leading [focus], our food channel is the top site category on marthastewart.com, Martha Stewart kitchens tests hundreds of new recipes each year, and our food styling and photography are unparalleled."

MSLO said it is already working with the $59 billion warehouse club retailer's private label team to create a line of fresh, refrigerated and frozen foods under the Kirkland Signature by Martha Stewart co-brand. The rollout is "likely an '08 event," Lyne said. But the two companies "may get to market a little earlier with a few things," she added.

On choosing Costco, "The challenge was finding a partner who shared our commitment to raising the bar for consumers and ramping this business to its full potential," Lyne said, calling Costco "a company we've long admired for innovation and high quality and high volume foods."

In other merchandising news, MSLO said that while its new upscale area rug collection with supplier Safavieh is not yet available to consumers, activity by "wholesalers coming out of Atlanta rug market in January and High Point market in March" was positive.

MSLO is "optimistic that these beautiful rugs will be met with the same enthusiastic response from Macy's customers that our Bernhardt furniture has." The storewide Martha Stewart Collection program launch with Macy's is set to debut late this summer.

MSLO sees revenues of $330 million to $340 million in 2007, said cfo Howard Hochhauser, predicting a second-quarter loss of $7.5 million to $9.5 million, meaning that investments associated with the launch of Blue Print magazine, the relaunch of marthastewart.com, and newer merchandising programs would not see much return until the second half of the year.

Martha Stewart Living Omnimedia

Qtr.3/31 ($millions)

2007

2006

% change

(loss)
a. First quarter 2007 results include a $5.7 million ($0.11 per share) non-cash charge associated with the vesting of a portion of a warrant granted in connection with the production of the syndicated TV program.
b. Average gross margin calculated as the ratio of: total revenues less production, distribution and editorial costs; over total revenues.
c.Includes selling, promotion, general and administrative expenses.